State Sales Tax on Drop Shipments: Navigating Various States' Rules on Registrations and Exemptions

Transcription

1 Navigating Various States' Rules on Registrations and Exemptions THURSDAY, JUNE 25, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Attendees must stay connected throughout the program, including the Q & A session, in order to qualify for full continuing education credits. Strafford is required to monitor attendance. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

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4 State Sales Tax on Drop Shipments June 25, 2015 Mike Dillon Dillon Tax Consulting Jeff Weinkle Habif Arogeti & Wynne

5 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

6 Navigating Various States' Rules on Registrations and Exemptions

7 Fundamental Concepts 7 What is A Drop shipment? Three parties / Two separate transactions A purchase by Primary Purchaser (PP) for resale to their Customer and shipment of tangible personal property from a Supplier directly to the Primary Purchaser s Customer, at the direction of the Primary Purchaser Can be subsequent resale by Customer

8 Fundamental Concepts 8 What is A Drop shipment? In E-Commerce, enables retailers to purchase individual orders from suppliers and have suppliers fulfill to customer Instead of purchasing a large amount of inventory, you simply partner with a drop shipping supplier and list their merchandise for sale.

9 Fundamental Concepts 9 TYPICAL SALES TAX TREATMENT OF A SIMPLE DROP SHIPMENT When all three parties are in the same state, the Primary Purchaser furnishes a resale certificate to the Supplier, rendering the first sale a nontaxable transaction. The Primary Purchaser then collects sales tax on behalf of the state on the secondary sale to its Customer. Customer may also issue a resale certificate for subsequent resale, or exemption certificate for other exempt use

10 Fundamental Concepts 10 TYPICAL SALES TAX TREATMENT OF A COMPLEX DROP SHIPMENT When NOT all three parties are in the same state, the tax treatment gets more complex and varies by state and facts. BIGGEST ISSUE assuming transaction sitused to Customer state NEXUS, NEXUS, NEXUS who has it and what does state say about their obligations

11 Problematic Scenarios / Issues 11 ONLY PRIMARY PURCHASER IN CUSTOMER STATE When only Primary Purchaser and Customer are in Customer s state, this does not present a problem, as the Wholesaler does not have a sales tax compliance obligation and does not seek a resale certificate. Prudent Supplier will collect resale certificate anyway Primary Purchaser collects sales tax from Customer

12 Problematic Scenarios / Issues 12 ONLY CUSTOMER IN CUSTOMER STATE When only Customer is in Customer s state, this does not present a problem, as the Wholesaler does not have a sales tax compliance obligation and does not seek a resale certificate. Primary Purchaser does not have a sales tax compliance obligation and does not collect sales tax from Customer Customer has obligation to remit use tax

13 Problematic Scenarios / Issues 13 ONLY SUPPLIER AND CUSTOMER IN CUSTOMER STATE When only the Supplier and the Customer are in Customer s state, this present a problem Wholesaler has obligation to obtain resale certificate from Primary Purchaser or collect sales tax Primary Purchaser does not have resale certificate for destination state Primary Purchaser does not have a sales tax compliance obligation and cannot collect sales tax from Customer

14 Problematic Scenarios / Issues 14 ONLY SUPPLIER AND CUSTOMER IN CUSTOMER STATE: QUESTIONS? Does Supplier have nexus? Supplier is obligated to collect tax from the PP on the drop ship transaction unless the PP can provide exemption documentation (deemed acceptable by the ship-to state). Does ship-to state allow PP to issue home state certificate? If so, no problem. Does ship-to state allow PP to issue other documentation? If so, no problem.

15 Problematic Scenarios / Issues 15 ONLY SUPPLIER AND CUSTOMER IN CUSTOMER STATE: QUESTIONS? Where does title transfer? If it transfers in other state, does PP have nexus in that state? Does Supplier? Common carrier used? How does the transaction state treatment drop-shipments? Can PP provide certificate or alternative document? Is Customer claiming an exemption? Resale? If so, many states allow Customer to pass through certificate to Supplier. Is the Primary Purchaser a foreign entity? If so, does state accept other documentation as proof of resale?

16 Problematic Scenarios / Issues 16 OTHER NEXUS CONSIDERATIONS Just because PP is not registered in Customer state does not mean that it does not have nexus and should not be registered. Does PP have inventory maintained in state (e.g., Amazon FBA program)? Does PP send sales reps into state sporadically? Does PP have contractors or third party service reps in state? Does PP pick up merchandise or do anything in the state, through employees or reps?

17 Problematic Scenarios / Issues 17 OTHER NEXUS CONSIDERATIONS To Increase the Number of Taxpayers, Trend is To Enact Far- Reaching Nexus Standards Click-Through Nexus: AR, CA, CT, GA, IL, KS, ME, MI, MN, MO, NJ, NY, NC, RI, TN, VT Affiliate Nexus: AR, CA, CO, GA, IL, IA, KS, ME, MO, NY, OK, SD, TX, UT, VA, WV. These states adopted a Remote Seller Standard: DC, LA, MD, NM, ND, PA, SC, TN, WA

18 Problematic Scenarios / Issues 18 OTHER NEXUS CONSIDERATIONS Often, when I am brought in to evaluate drop-shipments, we determine (1) PP has nexus it did not realize it has, or (2) there is an exception to certification requirement Does registration for sales tax / resale certification create income tax obligations? Typically only if taxpayer exceeds income tax nexus thresholds.

19 Problematic Scenarios / Issues 19 DOCUMENTATION REQUIREMENTS Invoice should indicate Ship To location and Shipping Terms, as these dictate what state certification rules apply Resale Certificates - What is acceptable? o Ship-to cert with Ship-to account number (CA, DC, MD) o Ship-to state cert with PP home state tax account number (MI, NJ, NY, TX, VA) o MTC Multi-jurisdictional Resale Certificate (ME, OK, RI, UT) o SSTP Exemption / Resale Certificate (WA)

20 Problematic Scenarios / Issues DOCUMENTATION REQUIREMENTS Resale Certificates - What is acceptable? 20 o Ship-to state cert with note that purchase is for resale, or No nexus statement on PP letterhead/ invoice (FL, LA) o Home State cert with home state account (NJ, VT, VA) o Other documentation - for example, an invoice from the PP to its customer, showing that the item was actually resold, along with a statement from PP explaining why it had not obtained a resale number and certifying that the purchase was a purchase for resale (IL, MI, VA, WV)

21 Problematic Scenarios / Issues 21 DOCUMENTATION REQUIREMENTS Resale Certificates - Exceptions: Customer is reselling or using for exempt purpose nearly every state permits the PP to provide evidence that their transaction and/or subsequent purchase is for resale Transfer of title in another state o FL provides that this is not a taxable sale o What about state in which title transfers? o Consumer has ultimate use tax obligation

22 Ongoing Compliance Demands 22 UNDERSTANDING COMPLIANCE RESPONSIBILITIES DEVELOPING DROP SHIPMENT PROCEDURES & USING AUTOMATION TOOLS PREPARING FOR AUDITS DEALING WITH AUDITS

23 Ongoing Compliance Demands 23 SUPPLIER RESPONSIBILITIES When must tax be collected on drop-shipment sales? o Understand the scenarios under which Suppliers must collect tax o Can this tax be passed on to the Primary Purchaser? Is resale support acceptable? o Required support varies by state and may be dependent upon Primary Purchaser registration

24 Ongoing Compliance Demands 24 SUPPLIER RESPONSIBILITIES On what tax base price is the sales tax computed? o Supplier s sales price to Primary Purchaser o Primary purchaser s sales price to Customer o Other methods Work with tax professionals to obtain a matrix of state rules and develop drop-shipment policy/procedures

25 Ongoing Compliance Demands 25 PRIMARY PURCHASER RESPONSIBILITIES Will Suppliers charge sales tax on a sale if unable to provide valid exemption support? Have relationships with drop-shipping Suppliers created nexus in any state?

26 Ongoing Compliance Demands 26 AUTOMATION TOOLS Create, validate, store, & manage certificates Integrate with ERP, accounting, tax decision and POS systems Avalara CertCapture, Vertex ECM, ONESOURCE TCM Work with your tax professionals to implement home grown platforms

27 Ongoing Compliance Demands 27 PREPARING FOR AUDITS Establish policy and procedures now o Procedures when making sales, invoices o Maintaining documentation o Automation Audits are not the only risk exposure discovered during due diligence Stay current - sales tax laws are constantly evolving

28 Ongoing Compliance Demands 28 DEALING WITH AUDITS Only provide requested information Involve your tax advisor Manage Auditor Expectations Up front

29 Ongoing Compliance Demands 29 DEALING WITH AUDITS Suppliers Was proper exemption evidence maintained? If tax was collected, at what sales price? Primary Purchaser Have Supplier activities created nexus? Is there any other physical presence? Customers Do you have documentation that Supplier collected tax from Primary Purchaser?

30 States That Pose Particular Issues 30 STREAMLINE SALES TAX PROBLEMATIC STATES

31 States That Pose Particular Issues 31 STREAMLINE SALES TAX MEMBERS Full members have adopted laws consistent with the SSUTA: AR, GA, IA, IN, KS, KY, MI, MN, NE, NV, NJ, NC, ND, OH, OK, RI, SD, UT, VT, WA, WV, WI, & WY SSUTA member states generally permit Suppliers/Drop-Shippers to claim a resale exemption using a resale certificate or any other acceptable information evidencing qualification for the resale exemption

32 States That Pose Particular Issues 32 CALIFORNIA Only valid Customer state exemption certificates accepted Supplier should collect tax on PP s retail selling price or Supplier s selling price with imputed markup CONNECTICUT Depends on when title transfers Only valid CT exemption support accepted Supplier collects tax on the PP s sales price to the Consumer, if known*

33 States That Pose Particular Issues 33 FLORIDA Suppliers may not be required to collect tax when both the Supplier and Primary Purchaser are located outside of FL The state determined in a 2007 Technical Assistance Advisement that such sales were not FL sales HAWAII General Excise Tax Supplier taxed at retail rate unless valid HI exemption certificate obtained

34 States That Pose Particular Issues 34 MASSACHUSETTS Only valid MA exemption certificates accepted Supplier must collect tax based on Primary Purchaser s retail selling price to Customer TENNESSEE Associate SSUTA member, drop-shipment conformity to be effective July 1

35 States That Pose Particular Issues 35 MARYLAND, MISSISSIPPI, PENNSYLVANIA & WASHINGTON, D.C. Only valid Customer state exemption certificates are accepted, so Primary Purchaser must be registered in the Customer state to provide a resale exemption Suppliers collect tax based on their selling price to Primary Purchaser

36 States That Pose Particular Issues 36 AUDIT ISSUES IN PROBLEM STATES Audit practices in states that don t accept another state s resale certificate? Examples